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December is the season for end-of-year tax planning, and the looming potential for individual income tax reform in 2017 – with proposals from both President-Elect Trump, and the House GOP – makes planning in 2016 more complex, but also potentially more beneficial.

The reason is that the tax reform proposals could enact substantial changes to the tax brackets themselves – with the most likely outcome being lower tax rates for most people – which makes it especially appealing to defer income into next year (when rates may be reduced), and maximize deductions this year (at the currently more favorable rate).

In addition, the House GOP proposal would eliminate many popular itemized deductions (keeping only mortgage and charitable), which further enhances the benefit of claiming any/every deduction possible, before the end of the year (and while it still lasts!)

On the other hand, President Trump has proposed to leave itemized deductions in place, but cap them (at $100,000 for individuals and $200,000 for married couples), which wouldn’t impact most people, but could have profound implications for those making large charitable gifts. Ultimately, it’s possible – and even probable – that a carve-out for charitable giving could be implemented, if the deduction cap really is imposed next year. But just in case, those who are inclined to make large gifts might want to seriously consider contributing to a Donor Advised Fund before the end of 2016, in order to claim the deduction this year without a cap (to the extent otherwise permitted under the current charitable contribution rules), and rely more on Qualified Charitable Distributions from IRAs in the future to navigate the potential deduction cap!

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With the Republican clean sweep of both the White House and both houses of Congress, momentum is building for 2017 to be a major year of tax reform, both for corporations, and for the individuals that financial advisors work with.

Accordingly, in today’s blog post, we delve in depth into both the likelihood of individual tax reform itself, and the details of the proposals from both President Trump, and the House Republicans. In fact, a deeper look reveals significant differences in both the style of tax reform between the President and House GOP proposals, as well as the deficits they imply – which itself could actually prove a stumbling block to getting legislation passed.

Nonetheless, both proposals would drastically simplify the tax brackets, from the current 7 tiers of tax rates, down to just three: 12%, 25%, and a top rate of 33% that kicks in at $225,000 (for married couples, or $112,500 for individuals). Both proposals would still keep preferential rates for capital gains and qualified dividends, although President Trump would retain the current 3 brackets (0%, 15%, and 20%), while the House GOP would simply make the rates 50% of the ordinary tax bracket (which means investment income would be taxed at 6%, 12.5%, and 16.5%).

However, when it comes to deductions, the proposals diverge substantially, with the House GOP suggesting the elimination of virtually all individual tax deductions except the mortgage and charitable deductions (paired with an expanded standard deduction), while President Trump would keep all the current itemized deduction rules, but cap itemized deductions (at $100,000 for individuals, or $200,000 for married couples) while also expanding the standard deduction even more (so only a moderate subset of people between the standard deduction and the cap would ever itemize at all).

Given all these differences, it remains to be seen whether individual tax reform will really happen in 2017, and whether key parts are compromised or delayed to accomplish corporate tax reform instead. In addition, despite now being the minority party in both the House and Senate, the Democrats still retain the ability to filibuster legislation, which will further limit the ability of Republicans to engage in permanent tax reform without compromising some concessions to Democrats. Or alternatively, the Republicans could ultimately pass individual tax reform as budget reconciliation legislation… which, under the Byrd rule, would have to sunset by December 31st of 2026, setting up a reprise of President Bush’s infamous sunset provision on his signature 2001 tax reform!

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Given the especially contentious election cycle, many people have stated that if their opposing party’s candidate wins, they’re seriously thinking about leaving the country. And in point of fact, the number of people who renounce their U.S. citizenship actually has been on the rise in the past 15 years, though it is still a fairly low number in total.

However, the reality is that for those with a substantial net worth – in excess of $2M of total assets – and/or those who have an especially high income, their renunciation of citizenship can subject them to the so-called “Covered Expatriate” rules, which include a deemed disposition tax that can cause the individual’s entire net worth to become immediately taxable upon leaving… including triggering all unrealized capital gains, and the instant deemed liquidation of all their IRAs!

In this guest post, Raoul Rodriguez – a specialist in cross-border financial planning (particularly between the US and Mexico) – discusses the tax issues involved in determining whether someone actually would be a Covered Expatriate if they decide to renounce their U.S. citizenship, the deemed disposition exit tax and other tax complications that may arise, and the planning opportunities that are available to at least try to mitigate the consequences.

So whether you have a client who is seriously talking about leaving the U.S. if the “wrong” candidate wins the presidential election, or you simply have clients who wistfully suggest they “might” someday leave, hopefully this article will be helpful in getting you up to speed about how the rules actually work… just in case it ever does become necessary to know!

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For those who already have a charitable intent and are over age 70 ½, the now-permanent rules permitted a Qualified Charitable Distribution (QCD) directly from an IRA to a charity provide an appealing means to minimize the tax bite of an RMD. Of course, it’s always possible to simply donate to charity and claim a charitable deduction to offset the income of an RMD, but given that in practice the income and deduction rarely offset each other perfectly, the QCD offers a slightly better potential tax outcome.

However, while donating from an IRA to satisfy an RMD obligation may be more effective than separately taking the RMD and donating cash (or writing a check) to the charity, it is usually not as good as donating low-basis stock or other appreciated investments instead. The reason is that while a QCD is a “perfect” pre-tax contribution, donating investments allows for a pre-tax contribution that also permanently avoids a long-term capital gain.

On the other hand, the reality is that charitable donations often have limits of their own, from the fact that they’re only valuable for those who itemize deductions in the first place, to the 30%- and 50%-of-AGI charitable contribution limits that may apply as well. Furthermore, donating low-basis stock may still not fully offset the income from an RMD, where that income increased AGI and triggered the phase-in of Social Security taxation or the phase-out of other significant deductions.

Ultimately, then, the relative benefits of QCDs will depend significantly on the facts and circumstances of the situation, driven primarily by whether or how much a donation of low-basis investments could really be claimed as a full deduction in the first place. On the other hand, it’s also important to remember that for those who don’t have a charitable intent in the first place, the optimal strategy is still to just take the RMD, pay the taxes, and keep the remainder; QCD strategies are still only best for those who want to maximize the tax benefits of charitable giving they already planned to do in the first place!

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With its ability to accept a “rollover” from almost all other types of tax-qualified retirement accounts, the IRA has become the most popular type of retirement account, now accounting for a whopping $7.4 trillion of assets (according to ICI). Yet to prevent abuse, IRA rollovers have very specific rules, including only being permitted to do one IRA rollover in a 12 month period, and that any rollover contribution must be completed within 60 days of when the prior account distributed the money.

And unfortunately, the growth in the number of IRA accounts and related rollovers, combined with strict time-based deadlines, has perhaps inevitably led to more and more situations where individuals fail to complete a rollover in a timely manner, which can cause the entire amount of the rollover to become taxable. In turn, this led Congress to grant the IRS the ability to provide individuals a process for requesting a “hardship waiver”, via a private letter ruling, to fix a rollover mistake. But the sheer volume of demand for relief has caused the IRS to repeatedly raise the cost of a PLR for a rollover fix, from $95 in 2003 to as much as $3,000 in 2006 and now as high as $10,000 in 2016.

Now, in the new Revenue Procedure 2016-47, the IRS has announced a new and greatly expedited process to receive relief and the ability to fix a botched IRA rollover. If the 60-day deadline was missed for any of 11 different reasons specified in the new guidance – from a natural disaster to an illness or death in the family to an error of the financial institution – the individual can now complete a late rollover contribution as soon as practicable, and simply provide the financial institution a “self-certification” that the rollover was permissible based on one of the specified reasons. And the IRS has even provided a Model Letter for Self-Certification that any individual can use.

Ultimately, the new process won’t resolve every possible scenario where an IRA rollover might be late, most notably where the taxpayer just botches the timing by not paying attention, due to aggressively using the rollover as a temporary personal loan, or due to bad advice from a financial advisor. Nonetheless, for what are likely the overwhelming majority of scenarios, the new self-certification process will make it fast and easy for most individuals to fix legitimately innocent rollover mistakes… though the IRS still reserves the right to evaluate the situation after the fact, and make an adjustment if the individual was not forthright in the process!

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For nearly a decade, the rules allowing for a tax-free Qualified Charitable Distribution (QCD) directly from an IRA to a charity has been on-again, off-again, a part of the infamous Tax Extenders that would lapse and be reinstated every other year.

With the Protecting Americans from Tax Hikes (PATH) Act of 2015, though, the QCD rules have finally been made permanent, making it easier to engage in proactive charitable giving strategies that help to minimize the tax bite of an IRA’s Required Minimum Distribution (RMD) obligations.

However, obtaining the tax benefits for doing a QCD from an IRA to a charity requires meeting very specific requirements, including a minimum age limitation, a maximum dollar amount limitation, and contributing to only certain types of eligible (public) charities (rendering private foundations, donor-advised funds, and split-interest charitable trusts all ineligible).

In addition, there is the most stringent requirement – though also the easiest to satisfy – that for an IRA distribution to qualify as a QCD, the check cannot be made payable to the IRA owner and instead must be made payable directly to the charitable entity (though the check payable to the charity can be sent to the IRA owner and forwarded on to the charity).

Fortunately, though, with QCDs made permanent under current law, at least IRA owners have the entire year to strategize and decide whether to engage in charitable giving – but remember that once an RMD has been distributed, there’s no way to undo it and turn it into a QCD later!

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Every February, the President formulates a budget request for the Federal government, which Congress then considers in coming up with its own budget resolution. And while many provisions of the President’s budget pertain to actual recommendations on appropriations for various government agencies, the proposals often include a wide range of potential tax law changes, recorded in the Treasury Greenbook.

Given that this is an election year and already within less than 12 months of the end of President Obama’s term, there is little likelihood that any of the President’s substantive tax changes will actually come to pass, from a version of the so-called “Buffet Rule” (a “Fair Share Tax” for a minimum 30% tax on ultra-high income individuals), an increase in the maximum capital gains rate to 24.2% (which would total 28% including the 3.8% Medicare surtax on net investment income), or a rewind of the estate tax exemption back to the $3.5M threshold from 2009.

And in this context, it’s notable that the President’s budget proposal does include a wide range of potential crackdowns on individuals, from a new cap on the maximum gain to be deferred in a 1031 like-kind exchange of real estate, to the addition of lifetime Required Minimum Distributions for Roth IRAs after age 70 ½, the elimination of stretch IRAs and step-up in basis at death, shutting down the “backdoor Roth contribution” strategy, and more!

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Late last night, the House Ways and Means committee came to an agreement for key legislation to renew the so-called “Tax Extenders”, a series of tax provisions that have lapsed and been reinstated (i.e., “extended”) repeatedly over the past decade. The new legislation, entitled the Protecting Americans from Tax Hikes (PATH) Act of 2015, will once again retroactively reinstate for 2015 the tax extenders that were renewed for and then expired at the end of 2014.

Unlike past tax extenders legislation, though, this time many of the provisions are permanently renewed. From the popular qualified charitable distribution (QCD) rules for making charitable contributions from an IRA for those over age 70 ½, to the American Opportunity Tax Credit for college, and the deduction for state and local sales taxes, this will be the last time that these key tax planning provisions remain in an end-of-year limbo!

However, not all tax extenders provisions were made permanent; a few, such as 50% bonus depreciation for businesses and the work opportunity tax credit, are only extended a few years. The legislation also includes a few new “tweaks”, from a slight expansion of how qualified distributions from section 529 plans can be used, to the elimination of in-state-plan requirement for the coming new 529-ABLE plans for disabled beneficiaries.

Although the PATH legislation has not quite passed yet – it still needs to be Omnibus Appropriations legislation that sets the government’s budget through September 30 of 2016 – the tax extenders expected to pass in its agreed-upon form in a matter of days, once the remainder of the rulemaking process is completed.

And notably, the final version of the Omnibus legislation will not include any changes to the Department of Labor’s fiduciary proposal, which remains intact and on track for the DoL to issue its final year in the coming months!

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Back in 1991, Congress first enabled the “Pease limitation” phasing out itemized deductions, and the “Personal Exemption Phaseout” (PEP), which were designed to limit the tax benefits of those deductions for higher-income taxpayers. While the PEP and Pease limitations were themselves phased out in the mid-2000s, the American Taxpayer Relief Act of 2012 re-enacted them beginning in 2013, making them a current tax planning issue.

Yet the irony is that while they are referred to as “phaseouts of itemized deductions” and a “personal exemption phaseout” the reality is that the Pease limitation and PEP are applied primarily based on the extent by which someone’s income is over specified thresholds. As a result, while they’re labeled as penalties to deductions and exemptions, the Pease limitation and PEP actually function more like surtaxes on income, amounting to a 1% marginal tax rate increase for the Pease limitation, and another 1% rate increase per family member for the PEP.

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Since the income limits on Roth conversions were removed in 2010, higher-income individuals who are not eligible to make a Roth IRA contribution have been able to make an indirect “backdoor Roth contribution” instead, by simply contributing to a non-deductible IRA (which can always be done regardless of income) and converting it shortly thereafter.

However, in practice the IRA aggregation rule often limits the effectiveness of the strategy, because the presence of other pre-tax IRAs and the application of the “pro-rata” rule limits the ability to convert just a new non-deductible IRA. On the other hand, those with a 401(k) plan that allows funds to be rolled in to the plan can avoid the aggregation rule by siphoning off their pre-tax funds into a 401(k) plan, and then converting the now-just-after-tax IRA remainder.

Perhaps the greatest caveat to the backdoor Roth contribution strategy, though, is the so-called “step transaction doctrine”, which allows the Tax Court to recognize that even if the individual contribution-and-conversion steps are legal, doing them all together in an integrated transaction is still an impermissible Roth contribution for high-income individuals to which the 6% excess contribution penalty tax may apply. Fortunately, though, the step transaction doctrine can be navigated, by allowing time to pass between the contribution and subsequent conversion (although there is some debate about just how much time must pass!). But perhaps the easiest way to avoid the step transaction doctrine is also the simplest – if the goal is to demonstrate to the IRS and the Tax Court that there was not a deliberate intent to avoid the Roth IRA contribution limits, stop calling it a backdoor Roth contribution in the first place!